An alternative strategy to taking losses

First off I'm not major player, just a small time options trader. Since my account is small, I watch every penny and work hard to limit my losses , often at the expense of big gains. But my strategies keeps my account healthy. But for stock traders with lots of cash, here is a strategy I think may be good.

Instead of taking a protective 7-8% loss on a position as most trading manuals suggest, if the position moves 5-6% against you sell a deep in the money leap. For example: Lets say you had bought GSF and it had dropped on you. When the stock was at $76.50 the spread on the jan 09 leap with a strike price of 50 was $28.70 x 29.60. You can usually split the spread and execute at the model price, but even if you just sold at the bid of $28.70 you would now be in this position:
Received $28.69
Strike price $50
total : $78.69

So you if the call ever gets exercised against you, you get $78.69 instead of selling for $76.50. Plus more than likely the stock will eventually turn around before Jan 09 and you can buy your short call back at a cheaper price and keep the stock through the run up.

If you really want to protect yourself, in case the stock drops below $50 you could have bought a Jan 09 50 put at the ask for $1.45 That gives you $78.69- 1.45 = $77.24. That is still better than the $76.50 and since you are long a Jan 50 put, if the stock starts to go up, short a 45 put against it and recoup some of that $145.

If anyone sees a flaw in this scenario I missed, I'd appreciate the comments.

" Where are you supposed to come up with the margin for all this naked shorting?

How do you figure there is naked shorting? You already own the stock.
1 covered call - no margin.
1- long put - no margin.
If the stock starts to go up and you short a lower sp put against your long put - that is a debit spread, not a naked short- no margin.

In this scenario if you do nothing but sit on the position, at the worst you end up with $77.24 instead of $76.50. If you don't buy the long put because you don't think the stock will drop below $50, you end up with $78.69.

As for slippage, you sold the covered call at bid and are not buying it back unless the stock keeps tanking and then starts to run. So no slippage.

" The only thing you say that makes sense is that you are a small time player for sure. "

Christ, it shouldn't be that hard to understand since all you are doing is selling a covered call. That has got to be the most simple trading strategy there is. All I was asking is why traders that are getting ready to take a loss, don't just sell a deep in the money leap that when executed gives them more money than they would have gotten from just cashing out.

Chris, I have to agree with Nazzdack. Trading around a loss and screwing around with it only complicates your trading. I think it's better to keep it simple and cut the loss. If you think you were too early, watch it and re-enter the trade.

"Chris, I have to agree with Nazzdack. Trading around a loss and screwing around with it only complicates your trading. I think it's better to keep it simple and cut the loss. If you think you were too early, watch it and re-enter the trade"

You might be right plugger. Like I said, I don't trade stock, just options and since they have such large moves I am always hedging this against that or offsetting a losing pos on puts with a winning pos on calls etc...

"Chris, I have to agree with Nazzdack. Trading around a loss and screwing around with it only complicates your trading. I think it's better to keep it simple and cut the loss. If you think you were too early, watch it and re-enter the trade"

You might be right plugger. Like I said, I don't trade stock, just options and since they have such large moves I am always hedging this against that or offsetting a losing pos on puts with a winning pos on calls etc...

"Chris, I have to agree with Nazzdack. Trading around a loss and screwing around with it only complicates your trading. I think it's better to keep it simple and cut the loss. If you think you were too early, watch it and re-enter the trade"

You might be right plugger. Like I said, I don't trade stock, just options and since they have such large moves I am always hedging this against that or offsetting a losing pos on puts with a winning pos on calls etc...

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You mean you're locking in losses on stock which has moved in your face with shorting calls? I dont get the impression you've been trading options a long time, no offense.

You're basically saying when your delta moves against you then you stop yourself out with options rather then hard delta. Thats fine but its no revelation and lets call a spade a spade. You're trying to trade around delta thats gone in your face and you're willing to add even more risk to do it.